What Is the Total Margin Ratio in a Business?

by Dennis Hartman, Demand Media

Measuring the performance of a business is a key concern for outside analysts and financial leaders within the company. Performance changes over time can indicate how well operating and financial strategies are working, and whether they need to be changed. Even a small business can apply financial ratios to itself to track profit and overall performance. Total margin ratio is one such ratio that is simple enough for any organization to use.

Definition

Total margin ratio examines an organization's revenue as a function of its expenses. Unlike operating margin ratios, which only account for revenue from business operations, total margin ratio includes revenue from all sources. A high ratio indicates that an organization has its costs under control and is making a profit. While any type of organization can use its revenue and expense accounting data to compute a total margin ratio, the ratio is especially common within the health-care industry and in government accounting.

Formula

The basic formula for total margin ratio is net income divided by total revenue. Net income consists of the excess of revenue after subtracting expenses. This means that the only data that is necessary to compute a total margin ratio is total revenue and total expenses. However, getting this data is not necessarily a straightforward task. Businesses track revenue from different sources differently, so finding total revenue may involve adding up revenue from various sources.

Expressing Results

There are two major ways to represent the results of a total margin ratio equation. The first is as a ratio that compares revenue to expenses. Using a ratio, the benchmark for breaking even is 1:1, or 1.0. The other way to express total margin ratio is as a percentage. Here the benchmark becomes zero. Total margin ratio percentages can be positive to indicate profit, or negative to indicate a loss. Each analyst must choose the best way of expressing total margin ratios based on the questions under consideration.

Meaning

Total margin ratio is a convenient tool for measuring an organization's overall profitability. It is simple to calculate, requires readily available data, and can compare large and small organizations on a level playing field. However, total margin ratio does not account for other activities, such as investments and debt. This limits its usefulness in analyzing a company's fiscal health unless it is just one of several metrics that an analyst uses.

About the Author

Dennis Hartman is a freelance writer living in California. His work covers a wide variety of topics and has been published nationally in print as well as online. Hartman holds a Bachelor of Fine Arts from Syracuse University and a Master of Arts from the State University of New York at Buffalo.

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